Read more on our COVID-19 Resource Guide.
What’s first and foremost in the minds of most Americans right now are the health, lifestyle and economic effects of COVID-19 (coronavirus). We’re all making changes in our lives for all the right reasons, but there’s no doubting that the virus causes a certain level of uncertainty and general weirdness.
When investors aren’t certain what’s going to happen next, for reasons we’ll get into a little bit below, mortgage rates tend to fall. This could be a good time to consider refinancing. However, there are a few things about the situation that tend to make it a bit unique. We’ll go over what you need to know.
What Usually Happens When Mortgage Rates Fall
Before we get into what’s unique about the issues caused by COVID-19, let’s make sure to cover what generally happens to cause mortgage rates to fall.
In general, when people get nervous about the future of the economy, they move their investments from higher risk (but also higher reward) items like stocks to things like bonds, which have a lower return but a more guaranteed payoff.
Because mortgage-backed securities (MBS) – a major investment backed by the monthly payments of homeowners – are sold in the bond market, MBS tends to be more in demand when people move their money to the bond market. When there is more demand for the securities, the rate of return doesn’t have to be as high and mortgage rates can go down.
However, as we alluded to before, the current situation is a bit different.
What’s Unique About COVID-19 And Interest Rates?
COVID-19 is causing market swings to be about as volatile as they’ve ever been. There are a few reasons for this.
For starters, when there’s one big event that traders are following pretty much to the exclusion of all else, every headline (good or bad) has the potential to create quite a market swing. The COVID-19 situation is one of these captivating events.
Secondly, as it stands right now, no one really has a decent idea of when this is going to end, so they can’t be sure where the bottom is. As a result, you have more people than usual getting out of the financial markets entirely and investing in things like precious metals. This would tend to push mortgage rates up. Depending on the whims of investors, mortgage rates are extremely volatile right now.
That brings up the third point. Because rates are moving as much as they are, lenders are taking more risk than usual to hedge against the market when they’re locking rates for you. Because of this, you may pay a higher cost to lock your rate, particularly if it’s for a long period of time. Additionally, people are generally aware that rates are low as a result of market conditions and the Federal Reserve leaving the rate on short-term loans at or near zero. Because there’s so much demand, the amount of inquiries is somewhat overwhelming. In response, lenders may choose to raise their rates a little bit, so that’s something to be aware of.
Although the mortgage process is considered essential as a financial transaction, depending on where you live, there may be changes related to COVID-19 involving your appraisal, rate lock and closing process.
Fed Emergency Rate Cut
Because of housing plays such a significant role in the economy, something evidenced by the percentage of the gross domestic product that it makes up, the Federal Reserve sometimes intervenes, buying up lots of MBS in order to help keep mortgage rates low and encourage people to buy homes.
They’ve recently said that in addition to an emergency rate cut, they’re going to embark on another campaign of asset buying in response to the economic implications of COVID-19. This is one of several emergency moves the Fed has made. Since this initial announcement, they said they’re willing to do as much purchasing in the financial markets as is necessary to help stem the tide of any economic downturn caused by the virus.
Should You Refinance During The COVID-19 Situation?
Rates are still low, and because your home is your biggest financial investment, the equity can be very useful as a resource in times of trouble. But if you’re thinking of doing a refinance, there are several steps you should take to make sure that it’s the right move for you.
How Long Do You Plan On Being In Your Home?
Being able to answer this question will help you figure out the term length you want on any refinanced mortgage, which you can use as another factor in determining the right mortgage for you in addition to overall affordability. But there’s another reason asking this question is good.
If you plan on moving within the next 5 – 10 years, it could be worth your while to look at an adjustable rate mortgage (ARM). You get a lower rate initially with an ARM because the rate can adjust after the teaser period. But if you move before the end of the fixed-rate time frame, you don’t have to worry about whether the rate is going up and down in the end. Additionally, your payment will tend to be lower because most adjustable rate mortgages are based on 30-year terms. It’s something to think about.
Age Of Current Loan
The age of your current loan sometimes plays a role in whether you can refinance. Even if you can refinance, it doesn’t always make sense. If you’ve done so recently, it’s important to note that you may have to pay closing costs, which should be factored into your considerations.
Be sure to consult with your Home Loan Expert regarding any necessary waiting periods and if refinancing makes sense for you.
Plans For Monthly Savings
If you determine that you’re going to save money by refinancing based on the rate and term you can get, make sure that you have a plan for what you’re going to do with the money in order to put yourself in a better position. No one knows exactly when this is going to end. Also, if you save more money now, you can set yourself up to be better prepared for the next curveball life sends your way.
You could use your savings to build up an emergency fund. Maybe you choose to allow yourself to save money in the future by paying off high-interest debt now. You can also use this to catch up on saving for retirement if you stopped contributing temporarily while dealing with the situation caused by the virus.
It’s a very volatile market right now, so we advise all of our clients to rely on the advice of their Home Loan Expert at all times. If you’re considering your options, you can apply online.